Mexico’s position among Latin American economies is particularly sensitive to Trump administration trade policies because of its high level of trade exposure to the United States and because of President Donald Trump’s obsession with redressing trade deficits. But if Trump makes good on his threats to terminate NAFTA, or should the renegotiation talks falter, the likely result will be counterproductive to Trump’s aims. That’s because the Mexican peso will fall, by as much as 25%, according to some estimates, making Mexican products cheaper in the US and increasing the deficit.
To be fair, the demise of NAFTA would represent a multi-faceted problem for all concerned. A falling peso could encourage Mexican imports and U.S. investments in Mexican manufacturing but it could also increase costs to Mexican manufacturers in some areas, such as the price of U.S. natural gas.
The global credit insurer Coface recently released a report outlining possible outcomes of U.S. trade policies for Latin America. Costa Rica, El Salvador, and Honduras are all vulnerable to any eventual import measures imposed by the United States. But Mexico’s position is particularly sensitive because of the Trump administration’s articulated policy to focus on countries with a strong trade surplus with the U.S.
It’s questionable, to say the least, whether U.S. trade policy should be based on the extent of the deficit with any given trading partner. In the case of Mexico, the trade deficit picture is far more complicated than it is being portrayed by some politicians.
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